In the three-hour-long pre-Budget meeting with Finance Minister Nirmala Sitharaman, various stakeholders and regulators discussed key proposals including rationalisation in the tax rates on the equity markets, boosting the growth of certain categories of Alternative Investment Funds (AIFs) and alleviating the stress in the mutual funds industry.
Various concerns were raised in the meeting, which focussed on regaining confidence of domestic and foreign investors in the India’s capital market story, said two people in the know.
Sources said the government has sought opinion on the tax rates on equity products and also whether it is feasible to exempt Long-Term Capital Gains (LTCG) tax on securities held for over three years. Further, the ministry tried to understand how to mitigate the issues around other categories of funds such as infrastructure, social venture, venture capital and SME Funds, and how to make instruments such as Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) more attractive by doing away complexities.
Some of the key issues that were discussed include measures to woo foreign portfolio investors (FPIs) and help stressed non-banking finance companies, one of the persons said.
Sources said capital market stakeholders have submitted their views on the different rates of LTCG, Securities Transaction Tax (STT) and Commodity Transaction Tax (CTT). The group of senior officials said that rationalisation of the tax rates is required as it could remove uncertainty and ambiguity among investors.
Certain valuation and outgo regarding equity-taxes has been asked to be submitted by the department concerned, said one of the two persons quoted earlier.
“The equity market requires a confidence booster package to attract and incentivise investors for holding the investment for the long-term, so as to attract conventional investors who invest in other asset class," said a stock exchange official.
The government and regulators have had a few rounds of discussions over the taxation system for share markets in the past few months. Some of the officials were also of opinion that Dividend Distribution Tax (DDT) is also among factors that act as a hindrance to the inflows of foreign investment in the country.
At present, there are six assets class and all have different periods of holding to classify as short-term and long-term that draw different tax rates. However, the government is thinking if it is possible to have a uniform tax rate for all the asset classes. The LTCG tax was reintroduced on listed shares in 2018-19 after a gap of 14 years. It is levied at the rate of 10 per cent on a gain of more than Rs 1 lakh realised from share sales. Long-term means shares sold after one year of holding.
In a bid to ease tax compliance for investors infusing money in various asset classes, the task force on direct tax legislation suggested three broad categories: Financial equity, financial non-equity, and others (including property, gold and so on). Financial equity will contain all kind of shares. Non-equity will have debt funds as bonds, debentures and so on. The third section will have remaining asset classes.
With a view to give boost to the markets, the representatives of capital markets submitted several suggestions concerning risk capital issues, AIFs, mutual funds, commercial papers and standardisation of bond features, according to a statement by the finance ministry.